MODULE K: SMART CHOICES FOR
SAVING AND INVESTING
Common Sense Economics ~
What Everyone Should Know
About Wealth and Prosperity
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http://CommonSenseEconomics.com/
Turn on the learning light!
SAVING AND WHY IT IS IMPORTANT
Read: Why Save? by John Morton
 Watch: Delbert McClinton- Too much stuff

http://commonsenseeconomics.com/
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SAVING AND WHY IT IS IMPORTANT
http://commonsenseeconomics.com/
Why save?
1. To cover emergencies such as car repairs,
medical expenses, and job loss.
2. To buy expensive goods and services in the
future such as a car, a home, and education
without borrowing and paying interest.
3. To open the door more easily when opportunity
knocks.
4. To fund a comfortable retirement.
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SAVING AND WHY IT IS IMPORTANT
http://commonsenseeconomics.com/
Too many Americans will be unable to afford a
comfortable retirement.
 A majority of Americans in the private sector do
not have pension coverage.
 Over 60% of retired Americans rely on Social
Security benefits for all or most of their
retirement income.
 The average Social Security benefit is $1,230 a
month—not enough for a comfortable retirement.
 30% of workers reported they had less than
$1,000 in savings and investments.
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SAVING AND WHY IT IS IMPORTANT
http://commonsenseeconomics.com/
Do you plan to work forever?
You may think so, but one-half of current retirees
say they left the workforce unexpectedly because of
health problems, disability, or layoff.
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SAVING AND WHY IT IS IMPORTANT
Personal Savings as a Share of Income
http://commonsenseeconomics.com/
What is the personal saving rate today?
 Is this higher or lower than in the past?
 Is the trend for Americans to spend more or less?

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SAVING AND WHY IT IS IMPORTANT
http://commonsenseeconomics.com/
On average Americans save only about 5% of their
income. Why?
 The costs of saving are immediate, painful, and
certain.
 The benefits of saving are in the future and less
certain.
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SAVING AND WHY IT IS IMPORTANT
But this does not have to be you
http://commonsenseeconomics.com/
Start today to buy less stuff that loses value and
more stuff that gains value.
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BUILDING WEALTH
Read: Building Wealth Over Time by John
Morton and Scott Niederjohn
 Watch: Seinfeld-Compound Interest
 Watch: 2 Minute Finance–Types of Retirement
Accounts

http://commonsenseeconomics.com/
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BUILDING WEALTH

An investment is an asset designed to grow
your money over time.
http://commonsenseeconomics.com/
What is the difference between saving and
investing?
 Saving is putting aside money on a regular
basis in a safe place or product so you can
withdraw your money quickly and without
penalty when you need it.
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BUILDING WEALTH
http://commonsenseeconomics.com/
Economics, Scarcity, and Choice
 Resources are limited.
 People’s desire for goods and services is
unlimited.
 Therefore, we must make choices among
alternatives.
 Every choice means sacrificing the opportunity to
do something else. This is called opportunity cost.
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BUILDING WEALTH
http://commonsenseeconomics.com/
Budgeting is a tool to help you make wise
financial choices.
 Just as a GPS system helps a driver reach a
destination, a budget helps you reach your
financial destination.
 Budgeting does not need to be complicated,
but it does take time and practice.
 A budget is always a work in progress.
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BUILDING WEALTH
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Your goals determine your budget. Each of us will
have unique goals.
A budget is for those goals that can be achieved
with money.
Some goals are short-term (under 1 year) such as
buying food, clothes, rent, and entertainment.
Some goals are long-term (more than 3 years) such
as buying a car and home and funding retirement.
http://commonsenseeconomics.com/
Steps to Reaching a Financial Destination
1. Decide on your spending goals.
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BUILDING WEALTH
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Use disposable (after tax) or net income rather than
gross income.
Deductions from gross pay include state, local, and
federal taxes, Social Security tax (FICA), and
insurance coverage.
http://commonsenseeconomics.com/
Steps to Reaching a Financial Destination
2. Estimate your income.
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BUILDING WEALTH
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Fixed expenses are payments that are the same
each month. Shop carefully before signing a lease,
financing an automobile, or buying an
entertainment package or gym membership. These
expenses are longer-term commitments and harder
to cut.
Variable expenses change from month to month.
Expenditures for food, clothing, and entertainment
can be cut quickly.
Keep track of every expense for a month. Which
ones are most important? Which ones can be cut?
Then adjust your spending.
http://commonsenseeconomics.com/
Steps to Reaching a Financial Destination
3. Estimate your expenses.
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BUILDING WEALTH
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Everyone needs an emergency fund, or “real world”
savings account.
Savings are also needed to achieve short-term and
intermediate goals.
Savings give you flexibility in making future
choices.
http://commonsenseeconomics.com/
Steps to Reaching a Financial Destination
4. Plan your savings.
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BUILDING WEALTH
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As your goals change, your budget must also
change.
Expenses should always be on the chopping block.
Think about getting ahead by adding. Add income
by taking a better job or a second job. Plan your
career path and learn skills that will make you
more desirable to hire.
http://commonsenseeconomics.com/
Steps to Reaching a Financial Destination\
5. Evaluate and adjust your budget.
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BUILDING WEALTH
This might be the hardest step of all.
 Discipline pays dividends.

http://commonsenseeconomics.com/
Steps to Reaching a Financial Destination
6. Stick to your budget.
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BUILDING WEALTH
http://commonsenseeconomics.com/
Rules for Building Wealth
1. Save and invest early and often.
2. Invest for the long haul.
3. Don’t leave money on the table.
4. Diversify your investments.
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BUILDING WEALTH
http://commonsenseeconomics.com/
Save and Invest Early and Often
 Because of compound interest, your money
grows more the longer it is invested.
 Waiting to invest is costly because you will have
less interest earned available to earn more
interest later.
 Over time, earning interest on your interest
greatly increases your savings.
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BUILDING WEALTH
The surprising answer: Gina
Why? The returns from saving and investing
themselves generate future gains.
http://commonsenseeconomics.com/
Save and Invest Early and Often
Who will have a more comfortable retirement?
 Gina, who starts saving at age 21, saves for 10
years—and then stops
 Mike, who starts saving at age 30 and saves the
same annual amount as Gina but saves that
amount for 40 years
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BUILDING WEALTH
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By age 35, 1x current salary
By age 45, 3x current salary
By age 55, 5x current salary
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Invest for the Long Haul
How much you save for retirement?
 Save at least 8 times your ending salary to
increase the odds you won’t outlive your savings.
 Example: Someone with ending salary of $60,000
would shoot for
$60,000 x 8 = $480,000
 Can you stay on track?
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BUILDING WEALTH
401(k)s allow employees to save a percentage of their
pretax paycheck dollars in an employer-sponsored
account. Some employers match the contribution up
to a certain amount.
 403(b)s are similar to 401(k)s and are for employees
of public schools and nonprofits.
 In a Traditional IRA you do not pay taxes on your
contributions; you pay taxes on the future
withdrawals.
 In a Roth IRA you pay taxes on your contributions
but do not pay taxes on the principal or earnings on
the withdrawals.

http://commonsenseeconomics.com/
Invest for the Long Haul
 Tax Advantaged Retirement Accounts
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BUILDING WEALTH
Invest for the Long Haul
Roth IRA
Traditional IRA
Tax Treatment
Retirement income
taxed, but contributions
during working life
have tax advantages
Qualified retirement
income tax-free, but no
tax advantages from
contributions
Retirement income
taxed, but contributions
during working life
have tax advantages
Employer of
Individual
Employer sets this plan
up
Individual sets this
plan up
Individual sets this
plan up
Contribution Limits
Employee contribution
limit of $17.5k/yr for
under 50 in 2013;
$23k/yr for age 50 or
above; limits are a total
of pre-tax Traditional
401(k) and Roth 401(k)
contributions.
$5.5k/yr for age 49 or
below; $6.5k/yr for age
50 or above in 2013;
limits are total for
traditional IRA and
Roth IRA contributions
combined. Cannot
contribute more than
annual earned income.
$5.5k/yr for age 49 or
below; $6.5k/yr for age
50 or above in 2013;
limits are total for
traditional IRA and
Roth IRA contributions
combined. Cannot
contribute more than
annual earned income.
http://commonsenseeconomics.com/
401(k)
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BUILDING WEALTH
http://commonsenseeconomics.com/
Invest for the Long Haul
The role of Social Security:
 Cannot by itself provide comfortable retirement.
 Can begin collecting as early as age 62.
 But substantial benefits from waiting until full
retirement age, or even to age 70.
 It looks like an investment account – pay in
during working life, collect in retirement.
 But government does not invest the money.
 Depends on future tax revenues.
 Program almost certain to survive, though
benefit formulas expected to change.
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BUILDING WEALTH
http://commonsenseeconomics.com/
Don’t Leave Money on the Table
 Don’t borrow from your 401(k) or 403(b).
 Don’t withdraw money early from tax-deferred
accounts. If you do, you will pay taxes and
penalties.
 Money withdrawn is money not compounding,
that is, money not working for you.
 Search for low-cost high return investments.
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BUILDING WEALTH
Save $2 a day for two years when you turn 22.
 Next, $3 a day until you are 26.
 Next, $4 a day until you are 30.

At 30 you have saved $9,490 plus interest.
 If invested wisely, that early start adds $153,305
to your retirement wealth at age 67!
http://commonsenseeconomics.com/
Don’t Leave Money on the Table
 Retirement may seem remote now, but even
small savings can grow a lot. “When it comes to
starting, the best rule is: ‘Just do it.’”
 Common Sense Economics illustration (p. 160)

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BUILDING WEALTH
http://commonsenseeconomics.com/
Diversify Your Investments
 Risk is the chance that an investment will earn
less than anticipated or will even lose money.
 You can reduce risk by spreading money among
different investments.
 The farther out the time horizon of the
investment, the more risk you can take.
 Consider your tolerance for risk before investing.
Do not make riskier investments if you panic
when an investment loses value.
 Investments with higher returns generally
involve more risk.
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BUILDING WEALTH
http://commonsenseeconomics.com/
Risky Business: Types of Investment Risk
 Market price risk is the chance that the price of an
investment will decline.
 Business risk is the chance that a business will fail,
be less profitable than expected, or that a government
will not pay interest on the money it borrowed.
 Inflation risk is the possibility that the purchasing
power of the return on investment will be less than
expected because of inflation.
 Political risk is the risk that government action will
hurt your investment.
 Interest rate risk is the risk that changes in interest
rates will hurt your investment, particularly bonds.
 Fraud risk is the chance you invested with a person
who lied about the risks or return of the investment.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
Watch: Mutual Funds Simply Put
 Watch: Mutual Funds Explained: Buy Index
Funds

http://commonsenseeconomics.com/
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Low-Risk Saving Options
 These choices have lower risk and lower returns.
 They are most appropriate for savings you may
need in the short term.
 They allow you to access your money quickly and
without penalty.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Bank and Credit Union Savings Accounts
 Completely flexible
 Pay low interest rates
 Insured by the federal government and safe
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Certificates of deposit (CDs)
 Must be held until the maturity date or a penalty
will be assessed
 Pay higher interest rates than savings accounts
 Insured by the federal government and safe
 Search online to find the most favorable interest
rates
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Money Market Mutual Funds
 Investors’ money is pooled and invested in U.S.
Treasury bills and commercial paper.
 Quick access to your money—some funds even
offer check-writing.
 Not insured by the federal government
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Longer-Term Investments
 These investments are designed to grow your
money over the longer term.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Bonds
 Loans to governments, government agencies, or
corporations
 Pay a fixed interest rate
 Have a maturity date, the date the principal will be
returned to the investor
 Can be bought and sold before the maturity date
 Bond prices depend on interest rates and the
financial strength of the issuer.
 Prices of existing bonds rise when interest rates
decline.
 Prices of existing bonds fall when interest rates rise.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Stocks
 A share of stock represents a share of ownership
in a corporation
 When you buy the stock of a corporation, you
become a part-owner of the business.
 Corporate profits can be distributed to
shareholders in the form of dividends.
 Shareholders also benefit if the price of shares
increases, and they sell the shares. This is called
a capital gain.
 If the price of shares decreases and the shares
are sold, the difference is called a capital loss.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
The Rewards and Risks of Owning Stocks
 Stocks have the highest long-term rate of return
of any investment.
 Stocks are riskier than other investments.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Mutual Funds
 A mutual fund pools investors’ money and invests
the money in financial assets such as stocks and
bonds.
 Once a day an open-ended mutual fund
determines the net asset value (NAV) of one
share.
 Investors may buy shares from the mutual fund
at the NAV and sell shares to the mutual fund at
the NAV.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
The Galaxy of Mutual Funds
 There are over 18,000 mutual funds that would
like to invest your money.
 Mutual funds have different objectives. There are
growth funds, balanced funds, bond funds, value
funds, small company funds, international funds,
index funds, and energy funds. And that’s just for
starters!
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INSTRUMENTS FOR SAVING AND
INVESTMENT
Some mutual funds have loads or sales commissions.
They are called load funds. Stock brokers often push
load funds because of these sales incentives. Never
buy them.
 Some mutual funds do not charge loads. They are
called no-load funds.
 All mutual funds have expenses, which vary from
fund to fund.
 Some mutual funds sneak in a marketing fee called a
12b-1 fee.

http://commonsenseeconomics.com/
Mutual Funds Have Differing Costs
 Check the cost of a mutual fund before investing.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Actively Managed Mutual Funds
 Actively managed mutual funds try to earn a rate
of return that is greater than the market
average.
 Few funds have achieved this goal over the long
run.
 This year’s hot fund may be next year’s dog.
 Because they are actively managed, costs are
higher than for index funds.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Index Funds
 Index funds try to replicate a market average
such as the Standard and Poor’s 500 stock index
(S & P 500) or the total stock market average.
 For diversification, focus on a broad index such
as the S & P 500 fund or a total market index
fund.
 Avoid index funds that target only one sector of
the economy such as value index funds or smallcap index funds. They do not offer enough
diversification.
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INSTRUMENTS FOR SAVING AND
INVESTMENT
http://commonsenseeconomics.com/
Index Funds and Their Advantages
 Because the composition of the index is clear, it
costs less to manage an index fund than an
actively managed fund. Lower expenses mean
more of your investment is working for you.
 Most index funds have outperformed actively
managed funds over the long term.
 The expenses and performance of index funds
vary. Do your research before investing.
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INVESTING MADE SIMPLE
1.
3.
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2.
Save as much as you can each month. Build
your emergency fund in a federally insured
savings account or money market mutual fund.
Open an index mutual fund account for midterm and long-term goals.
Make regular contributions to a 401(k), 403(b),
Traditional IRA, or Roth IRA. Take full
advantage of employer matches. Do not
withdraw money until retirement unless you
have a real emergency.
Invest for your retirement and other long-term
goals with a broadly based, low-cost, equity
index mutual fund.
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